Tokyo – Q3/2020
MARKETINMINUTES
Savills Research

Residential Leasing

Savills team
Please contact
us for further
information
JAPAN
Christian Mancini
CEO, Asia Pacific(Ex Greater China)+81 3 6777 5150
cmancini@savills.co.jp

RESEARCH

Tokyo rents facing another marginal correction
Rents have posted a slight decline for a second consecutive quarter, thoughoccupancy remains at a high level.
• Rents in the Tokyo 23 wards (23W) saw a slight pullback
during Q3/2020, now standing at JPY4,076 per sq m – adecrease of 1.5% quarter-on-quarter (QoQ), but still 0.8%
higher year-on-year (YoY).
• Average mid-market rents in the central five wards (C5W)
also fell – albeit at a slower pace. Rents for Tokyo’s top
submarket are now at JPY4,835 per sq m after a decline of
0.5% QoQ, though rents are still up 1.8% YoY.
• The C5W saw its premium over the 23W average expand
back to around 18.5%, with only the South and Outer East
submarkets outperforming.
•A t the ward level, Edogawa marked the strongest growth thisquarter, posting an 8.7% QoQ gain. Shibuya took the top spot
on an annual basis, displaying robust growth of 8.0% YoY.
• In the C5W, average rents for units in the 15-30 sq m size
band remained flat, while units in the 45-60 sq m size bandor with 2-to-3 bedroom layouts saw growth.
•A fter suffering a mild blow during the April and May lockdown,
the average occupancy rate for the 23W recovered slightly,
rising 0.2 percentage points (ppts) QoQ to 96.6% as of
Q3/2020. That said, occupancy in the C5W has contracted once
again, falling 1.4ppts QoQ to 94.7% - its lowest level since 2014.
savills.co.jp/research• With work-from-home arrangements remaining thenorm, there are indications that preferences for unit typeare undergoing a shift, as more residents are prioritisingspaciousness over location.

“Average multi-family rents
continued to soften in
Q3/2020, though occupancy
has held steady. Amidst theongoing COVID-19 outbreak inTokyo, companies are expected
to maintain remote and flexible
working arrangements for thetime being. Preferences forresidential unit type, size, andlocation appear to be shifting
as a result.”
SAVILLS RESEARCH & CONSULTANCY

1

Tetsuya Kaneko
Director, Head of Research& Consultancy, Japan+81 3 6777 5192
tkaneko@savills.co.jp
Matthew D’Elia
Manager, Research &Consultancy, Japan+81 3 6777 5179
mdelia@savills.co.jp
Simon Smith
Senior Director
Asia Pacific+852 2842 4573
ssmith@savills.com.hk
Savills plc
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Residential Leasing

MAP 1: Tokyo’s 23 Wards By Survey Area

Adachi

Itabashi
Kita
NerimaKatsushika
Arakawa

ToshimaNakanoBunkyoTaito

SumidaShinjuku

Suginami

Edogawa

ChiyodaShibuya

Chuo

Koto

MinatoSetagaya
MeguroShinagawaTokyo 23 Wards
Central (C5W)
Ota

South
West
North (Inner)
North (Outer)
East (Inner)
East (Outer)

Source Savills Research & Consultancy

SURVEY GEOGRAPHY
In order to illustrate trends in the central
Tokyo residential market, Savills has
segmented Tokyo’s 23 wards into sevendistinct geographical areas: Central (or“central five wards”), South, West, North(Inner and Outer) and East (Inner and Outer).
RENTAL INDEX DATACHARACTERISTICS
Savills collates thousands of leasing comparables
each quarter in order to analyse trends affecting“mid-market” rental apartment units in Tokyo.
Our benchmark rental data is based on averageadvertised monthly rents for units which fit
the following criteria:
1) studio and one- or two-bedroom rental
apartments of up to 100 sq m in size,2) reinforced concrete structures built within
the last ten years, and
3) properties located in Tokyo’s 23 wards
and situated within a ten-minute walk of thenearest station.

savills.co.jp/research

In contrast to the luxury residential
market, advertised or “asking” rents for midmarket units fitting the above criteria are
typically non-negotiable and are not subject
to incentives such as rent-free periods. Savills
mid-market rental indices are therefore
considered to closely reflect movements incontract rents for the Tokyo market.
OVERALL RESULTS
After reaching a record high, average rents
for the 23W and C5W have contracted for two
consecutive quarters for the first time since2016 and have fallen below their four-period
moving averages, possibly indicating thatthe market has entered a downturn (Graph1). Indeed, it appears that latent demandhas yet to manifest following Tokyo’s soft
lockdown in April and May. With an ongoing
COVID-19 outbreak in the capital, many
companies are continuing remote working
arrangements whilst major universities
intend to do the same in the form of an
online semester. The population of Tokyo
Prefecture has thus remained flat sincereaching a high watermark of 14 million

2

in May. This, combined with restrictions
on prospective foreign residents entering
the country, has disrupted demand forresidential units in the 23W.
While landlords may find less demandfor vacant units over the coming months,
most can rest assured that their tenanted
properties will maintain stable performancefor the time being. Japan’s unemployment
rate stands at 3.0% as of August 2020, only
0.8ppts higher than its record low of 2.2%
in December of last year. As such, tenants
should generally have the capacity to
pay their current rents. That said, labourdemand has clearly fallen, with the jobto-applicant ratio dropping from 2.08x in
December 2019 to 1.22x as of August. This
will inevitably weigh on incomes and put
downward pressure on rental growth going
forward.
As rents generally fell faster in the outersubmarkets in Q3, the C5W’s premium
has expanded by 1.1ppts to 18.5% (Graph
2). Only the Outer East submarket posted
growth for the quarter, perhaps becauseof its affordability. This contraction is notoccurring across the board, however, as larger
units and layouts with multiple rooms haveseen rents grow so far this year.
Average occupancy in the 23W remains
comfortably high, rising 0.2ppts QoQ to
96.6%. The number of residential listings
continues to increase, however, suggestingthat a disruption to leasing demand may
lie ahead. Though leasing activity resumed
following the April and May lockdown, it
remains somewhat slower than in previous
years. C5W occupancy falling below 95%
is a case in point. Indeed, pent-up demand
was not as robust as landlords had originally
hoped and this is likely to be true until atleast the end of the year.
MID-MARKET RENTAL TRENDS BYSURVEY AREA
Average multifamily asking rents for the
23W have fallen by 1.5% QoQ, landing at
JPY4,076 per sq m as of Q3/2020. Rents arestill 0.8% higher YoY, remaining comfortably
above levels seen just prior to the Global
Financial Crisis. In a reversal from theprevious quarter, rents in the C5W saw a lesspronounced drop of 0.5% QoQ and remain
1.8% higher YoY. Some of the more expensive
submarkets in the 18 outer wards (18W)
pared back the rental gains made last quarter,
though all submarkets have maintained
higher rents on an annual basis (Graph 3).
Each ward in the C5W – save for Shibuya– experienced a quarterly decline in averagerents. With Minato’s rents declining 2.0%
QoQ and those of Shibuya rising 2.0% QoQ,
the latter has once again taken the top spot
for average rents in Tokyo. In fact, following
steady growth over the past year, thesubmarket has seen an 8.0% YoY increase inResidential Leasing

GRAPH 1: Mid-market Apartment Rental Index,
Q3/2008 to Q3/2020
Tokyo 23 ward average
Central five wards
4 period Mov. Avg. (Tokyo 23 wards)
4 period Mov. Avg. (Central five wards)

RENTAL INDEX, Q3/2008 = 100

115
110
105
100
95
90

Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3

85
2008
2010 2011 20122013201420152016201720182019
2012 2013 2014 2015 2016 2017 2018 2019 2020
082009200920102011
20

GRAPH 2: Rental Premiums/Discounts* vs 23W
Average, 2016 to 2020

PREMIUM / DISCOUNT TO 23W AVERAGE

2016

2017

2018

2019

2020

25%
20%
15%
10%
5%
0%
-5%
-10%
-15%

-20%
-25%

-30%
C5W

South

North
East
(Inner) (Inner)

West

North
East
(Outer) (Outer)

Source Savills Research & Consultancy* The above represents the average premium/discount over the respective year.

GRAPH 3: Mid-market Apartment Rents,
Q1/2014 to Q3/2020
Tokyo 23 Ward
West
East (Inner)
5,000

Central 5 Wards
North (Inner)
East (Outer)

South
North (Outer)

JPY / SQ M / MONTH

4,750
4,500
4,250
4,000
3,750
3,500
3,250
3,000

Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3

2,750
2,500

2014

2015

2016

2017

2018

2019

2020

Source Savills Research & Consultancy

savills.co.jp/researchrents, second only to the highly-discounted
Edogawa in the Outer East submarket.
Following nine consecutive quarters ofgrowth, the South submarket saw rents
remain more or less flat in Q3/2020, falling
just 0.1% QoQ to JPY4,168 per sq m. As in
the previous quarter, Meguro marked thestrongest growth – coming in at 1.4% QoQ
and 7.6% YoY. Rents in the ward are now
higher than those of both Chuo and Shinjuku
in the C5W. The number of new-unit listings
in Meguro has nearly doubled over the past
year, potentially contributing to this gain.
The ward’s proximity to Shibuya and Minato,
combined with the availability of green
spaces and a charming riverfront, could bemaking the area more attractive in the wakeof COVID-19. However, the high number of
new-unit listings could imply less demand
and rents could fall once these units areleased out. Nearby Shinagawa gave backsome of its recent gains with a 2.2% drop in
rents over the quarter. All wards in the South
still have higher rents on an annual basis.
After demonstrating impressive annual
growth of 8.2% as of last quarter, the Inner
North submarket saw a pullback in rents
during Q3. Specifically, rents fell 3.1%
QoQ – the most significant decline of any
submarket this quarter. This pullback was
led by Bunkyo, which, after posting robust
growth of 4.4% last quarter, saw those gains
disappear with a 4.8% QoQ contraction thistime around. Despite this significant drop,
rents across the ward remain 5.1% higher
on annual basis. Nearby Toshima posted amilder contraction of 1.2% QoQ, though theward’s performance on an annual basis is far
less impressive. On the other hand, given theward’s significant discount to both adjacent
Bunkyo and the C5W, and strong commercial
development pipeline, there may be more
upside potential in Toshima in the years tocome.
(Please refer to our Spotlight Report“Ikebukuro” for further analysis on the Inner
North submarket)
The Inner East submarket has similarly
seen a contraction after a period of robust
growth, with rents falling 1.6% QoQ, but
still up 4.0% YoY. With the largest rental
growth last quarter, Sumida saw the mostsignificant decline in rents this quarter,
falling 4.2% QoQ. Average rents in the ward
are still up 4.8% YoY, however. Taito andKoto marked YoY growth of 4.4% and 3.0%,
respectively, though rents in the former fell
0.5% while those of the latter remained flaton a quarterly basis.
The West submarket felt a mild
contraction of 0.5% in Q3/2020, and averagerents now stand at JPY3,682 per sq m.
Nakano, which led the submarket’s growth3

last quarter, saw rents fall by 0.3%, while
those of nearby Suginami remained flat.
Rents in Nerima, the most discounted ward
in the submarket, declined by 1.2% QoQ.
Each ward in the submarket is maintaining
higher rents on an annual basis, with Nakano
taking the lead at 4.9%. The ward appears tohave many times more listings than in thesame quarter last year, which is likely a key
contributor to its robust annual performance.
As in Meguro, however, the spike in newlistings could indicate a drop in demand,
while also setting the ward up for a larger
contraction in rents next quarter.
The Outer North submarket saw rents
soften once again after a 0.6% QoQ drop.
Itabashi continues to see its rents recoversomewhat after falling from a historic highin Q3/2019, posting growth of 0.9% QoQ
but still down 5.7% YoY. Kita experienced asoftening of 2.0% QoQ, but still maintains a
6.8% premium over the same period last year.
The Outer East, the 23W’s cheapest
submarket, was once again home to thestrongest growth of all surveyed submarkets
this quarter, with rents increasing 2.3%
QoQ and 4.6% YoY to JPY3,129 per sq m in
Q3/2020. Each ward in the submarket savefor Katsushika saw growth this quarter. In adivergence from last quarter, Edogawa, theleast expensive ward in the 23W, saw rents
grow 8.7% QoQ, the strongest growth of any
ward in Tokyo this quarter. This appears tohave largely been an upward correction giventhat Edogawa saw rents decline in the firsttwo quarters of the year. As such, despite
its quarterly contraction, Katsushika still
produced annual growth of 7.8%. The Outer
East is the most suburban submarket in
the 23W and recent rental growth here may
reflect a growing preference for a less urban
environment and more affordable areas.
Recent occupancy trends add some validity tothis argument.
OCCUPANCY RATESWith the resumption of leasing activity
following the April and May lockdown, theaverage occupancy rate in the 23W rose
0.2ppts QoQ to 96.6%. While this is a positive
development, the recovery in occupancy
rates is milder than initially expected.
Moreover, in the C5W, Tokyo’s top submarket,
occupancy has contracted 1.4ppts QoQ to
94.7%, falling below the 95% mark for the firsttime since 2016. The East submarket, on theother hand, has seen occupancy swing in theother direction, rising 2.1ppts to 97.9%, which
is probably supporting rental growth in thesubmarket.
Whilst beyond the scope of coverage inthis report, it is also worth noting that, basedon J-REIT disclosures, properties located inResidential Leasing

GRAPH 4: Average Occupancy For J-REIT Residential
Assets, Q1/2013 to Q3/2020*
23-ward average
South
East

100%

Central 5 wards
North & West

98%

96%

94%

92%

Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3

90%
2013

2014

2015

2016

2017

2018

2019 2020

Source Savills Research & Consultancy based on publicly disclosed J-REIT
property data (Advance Residence and Nippon Accommodation Fund)* Q3/2020 is as of August 2020

GRAPH 5: Rents By Unit Size, C5W,
Q1/2014 to Q3/2020
15-30 sq m

30-45 sq m

45-60 sq m

5,200

JPY / SQ M / MONTH

5,000
4,800
4,600
4,400
4,200
4,000

Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3

3,800
2014

2015

2016

2017

2018

2019

2020

Source Savills Research & Consultancy

GRAPH 6: Rents By Unit Layout And Proportion of
Listings, Q1/2019 to Q3/2020
StudioStudio (LHS)
4,600

1 Br
1 Br (LHS)

2 Br
2 Br (LHS)

3 Br
3 Br (LHS)
100%

80%

4,200
60%
4,000
40%
3,800

% OF LISTINGS

JPY / SQ M / MONTH

4,400

20%

3,600
3,400

0%
Q1

Q2

Q3

2019

Q4

Q1

Q2

Q3

2020
Source Savills Research & Consultancy

savills.co.jp/researchmajor hubs in the periphery of Greater Tokyo,
such as Yokohama and Funabashi (Chiba), areexhibiting almost full occupancy. This, alongwith trends observed in the East submarketof the 23W, might suggest that a common
perception is in fact true – namely that in theface of COVID-19, residents are leaving central
Tokyo in favour of more affordable suburban
environments. That said, these data represent
a small number of high-quality assets outsideof the Tokyo 23W. Still, this may imply an
emerging trend.
RENTS BY UNIT SIZETokyo’s rental market is principally made up
of compact single-occupier units, typicallyless than 45 sq m (13.6 tsubo) in size. Such
units can often make up as much as 75% ormore of the 23W area’s rental listings. Unlike
other major global cities such as London
and New York, house or apartment sharing
does not form a major segment of the rental
market. As a result, there is a large, stable
market for small- to mid-sized units.
Average rents for units in the 15-30 sq m
size band, which account for the lion’s shareof unit supply, have essentially remained flatover the quarter, extending the plateau seen
since Q4/2019. Units in the larger size bands
appear to have diverging trends, however.
Specifically, average rents for units ranging
from 30 to 45 sq m have seen a quarterly
decline, whilst those for units ranging from45 to 60 sq m have seen an increase overthe same period. The latter segment of themarket accounts for only a small portion of
total supply and therefore fluctuations arecommon. Even so, units in this size band
have been holding at a high level year to date.
While it may be too early to extrapolate
broad shifts in demand from these recent
rental movements, changing preferences forlayouts could partially explain the divergencein rents among units over 30 sq m. Within
the 30-45 sq m size band, for instance, there
tends to be a concentration of units around
40 sq m with one-bedroom layouts. Such
units are typically targeted towards couples,or individuals with more spending power.
The rise of dual-income households inparticular had been driving growth in thissegment of the market, with couples valuing
convenience over unit size.
The sudden implementation of work-fromhome arrangements has likely altered thisdynamic, prompting these demographics
to require more space and layouts with anadditional room. Individuals with extra
cash, for instance, are more mobile and likely
to change their lifestyle in response to the
COVID-19 environment. Units in the 45-60
sq m size band presumably have the two
bedroom layouts that would accommodate
this need. This, combined with the fact that
supply of units with such layouts is far more
4

limited, could be a factor supporting thissegment’s recent performance.
A SHIFT IN UNIT PREFERENCES?
Japan continues to adjust to a ‘new normal’in the midst of the ongoing pandemic.
Employees and companies of all types
are quickly being prompted to adapt toteleworking and flexible commutes to reduce
contagion risks. A Reuters Corporate Survey
undertaken in early August 20201 found that
office space utilisation, compared with a year
ago, has seen a sharp drop. Specifically, over asixth of firms said office utilisation had fallen
10-20%, while 25% said it had decreased 3050% and 9% said that it had more than halved
over the period. Whilst only a short-term
shift for now, the long-term effects are still
uncertain given the proportion of remote
working employees in a post-pandemic worldis still unknown. Regardless, increased flexible
working is seemingly becoming more likely.
The prevalence of compact studio andsingle-bed units in Tokyo has allowed many
to live in convenient locations at an affordable
price – optimal for a pre-pandemic lifestylewhere a home was little more than a place tosleep. With living spaces now playing host to
much more, preferences for unit layout andlocation have, unsurprisingly, changed. In
an attempt to measure this shift, SUUMO
conducted a survey analysing people’s
preferences for unit size vs. proximity to
the nearest station. The findings showedthat over a six-month period to July 2020,
preference for size had increased from 42%
to 52%, whilst station proximity had fallenfrom 40% to 30%. In both surveys, 18% of
respondents decided either was acceptable.
Whilst this data does not necessarily imply
an impending exodus from central Tokyo, theperception of the practicality of ‘micro-living’
has certainly shifted.
Average rental prices by layout lend somecredence to a growing preference for larger
units. Within our 23W sample set, larger
units (two-and-three bedroom) posted 2.5%
QoQ growth between Q2 and Q3/2020, evenas smaller units (studio and one bedroom)
recorded a fall in prices of 1.2%. It is worth
noting, however, that larger units represent
less than 10% of the overall sample set as of
Q3/2020 and are therefore more susceptible
to price fluctuations (Graph 6). Despite this,the divergence in growth over the longer
term since the start of 2019 highlights thatthe larger units have performed better, at
an average growth of 3.7%. This represents
a 2.2% margin over the smaller units.
Interestingly, units with larger layouts in
the C5W followed a similar trend, indicatingthat the coming shift in preferences may notnecessarily be geographic.
The distinction of work, office and home
1 The corporate survey, conducted for Reuters by Nikkei
Research between 3-13 August, polled 495 big and midsize
non-financial firms. Of that total, 220 firms responded to thesurvey.

Residential Leasing

has become unclear, as many Japanese corporates
announce an indefinite extension of remote
working policies, led by tech savvy companies
and increasingly supported by the government.
One deduction from these findings would suggestthat workers have been given the opportunity
to prioritise good health and a less stressful
lifestyle. Employees may now be looking to thesuburbs - drawn by cheaper rents, more spacious
housing and nature closer to hand. That said,
the aforementioned SUUMO survey reported
that 30% of respondents still prioritise station
proximity over size, suggesting that many people
are still willing to compromise and live minimally.
Nevertheless, signs of a shift in the market havestarted to appear. Whilst only modest at this stage,
they offer an indicator for the future of Tokyo’s
residential market.
OUTLOOKAs with essentially all asset types, the multi-family
residential sector is facing headwinds brought
about by the global pandemic and resulting
economic slowdown. With Japan’s economy laying
firmly in recession territory, the potential for
short-term rental growth will likely be outweighedby the financial constraints of residents. Still, thesector continues to display resiliency. Tokyo rents
have seen particularly robust growth since 2018
and much of the downward pressure in this quarteroccurred in the wards and submarkets that saw themost robust growth last quarter, suggesting that
rents are still facing a correction rather than ansavills.co.jp/research

outright downturn.
With this perceived resiliency, particularly whencompared to other core asset types such as office
and retail, overseas institutional investors, such as
Allianz Real Estate and AXA Investment Managers,
have made significant investments into the sector
during the first half of the year. Cap rates haveremained stable as result. As significant capital
continues to chase the few available assets, yields
are likely to remain flat for the time being.
Indeed, considering the extent of the current
global upheaval, prospects for the residential sector
are positive. That said, there are some indications
that the market is undergoing a transition that
could affect certain subsets of the sector. The C5W,
for instance, has seen occupancy in investmentgrade assets fall below 95% for the first time since2016 and rents for smaller units and layouts arefacing downward pressure. Further, latent demandfollowing the soft lockdown in April and May has
yet to manifest, as prospective residents fromregional Japan continue to hold off on making a
move to the capital.
While it is too early to assume that residential
demand is undergoing a paradigm shift, thesudden large-scale implementation of remote workand e-learning is certainly having some impact
on preferences for the type of living space andlocation. Despite the outbreak, many residents
still seem to prefer the urban lifestyle that only
Tokyo can offer. It is also worth noting that themedian age of a resident in the 23W is 44 years old,four years younger than the national average, but

5higher than in other global cities. As such, we can
expect a more conservative approach to relocations
amongst the overall population. There is also somehope for a relaxation of visa restrictions towards
the end of the year, allowing for some recovery indemand from foreign residents, which should be aboon for the C5W in particular.
In the end, Japan paints a far more stablepicture than other developed countries andthe residential sector is a key benefactor ofthis stability. Following Prime Minister Abe’s
resignation, the new cabinet appears likely tomaintain key economic policies, while leveraging
the well-established political clout of the Abe
Administration. The country and its capital
markets should thus remain stable – a stark
deviation from the West. Also, the unemployment
rate sits at 3.0% – compared to 3.9% in the United
Kingdom and 8.4% in the United States – as ofAugust. While unemployment is likely to tickup further as economic pressures drag on, massunemployment is unlikely to manifest soon andtherefore residents should still be able to cover
their rents for the duration of the pandemic. To be
sure, overall rental growth is likely to be curbed
in the short-to-medium term and occupancy islikely to soften. Even with this in mind, Japan’s
multi-family sector offers a comfortable degreeof certainty for those deploying capital in an
increasingly uncertain world.